China’s Third Plenum: Key reforms likely to usher in a new economic era

This year’s Third Plenum will carry historical significance given the structural economic slowdown, geopolitical tensions and an increasing emphasis on security and stability. Zhouchen Mao, Head of Research and Advisory, shares his analysis ahead of the key plenary session.

Key messages:

• The Third Plenum of China’s 20^th Central Committee – a plenary session of senior Party officials, expected to take place at the end of October – offers President Xi Jinping and the new leadership an opportunity to outline how they plan to manage the structural slowdown following a period of rapid economic growth.
• Third Plenums, which take place one year after new leadership takes office, typically provide clues as to the future direction of government policy and this year’s communique is expected to focus heavily on key the Party’s priorities, including self-reliance, technological innovation, national security and economic growth.
• The plenary session is also expected to provide further insights into the so-called New Development Pattern, President Xi’s strategy to drive growth through technological innovation and output in emerging sectors, such as new energy vehicles.
• The communique will likely stress the need to improve business sentiment and foster more openness to foreign investment, including by using Free Trade Zones (FTZs) to attract overseas investment.
• Pension and housing registration reforms could be announced as a part of broader efforts to boost domestic consumption and facilitate further urbanisation. However, local concerns about housing reforms may mean that any announcement is limited in scale and scope.

What to expect at the Third Plenum of 20^th Central Committee

The Third Plenum of the 20^th Central Committee is particularly significant as it is the first major economic event to take place since the 20^th Party Congress in October last year, where a new Politburo Standing Committee was introduced.

The Plenum offers this new team its first chance to map out the policy adjustments it will use to address an increasingly uncertain economic outlook. As such, business leaders will be scouring the final communique for policies and reforms that could alleviate the uncertainties affecting both consumers and investors.

Most importantly, this year’s Third Plenum will have historic significance. In the past decades, economic growth was the top priority for Chinese policymakers. However, security and “national rejuvenation” have taken centre stage. This shift is seen in changing Party doctrine. Former leader Deng Xiaoping’s dictum, “development is the absolute principle” has served as the foundation for economic policies implemented since the 1990s. In 2017, President Xi Jinping stressed both development and security are absolute principles[1]. Since the 20^th Party Congress last October, President Xi has repeatedly described national security as the basis for economic development, indicating that this will continue to play a significant role in economic policymaking over the medium term. Therefore, the Third Plenum will further indicate how the Party reconciles security and stability with boosting economic growth in its long-term strategic planning, including around jobs and income.

The Economic Context

This year’s Third Plenum is taking place as the economy continues to slow, marked by two key factors that will shape future development:

• The Chinese economy is undergoing a structural slowdown following a period of rapid growth, requiring adjustments to its growth model. This has become more difficult given both external and internal challenges such as US-China tensions.
• Increasing geopolitical tensions are strengthening calls for greater economic security in China as it prioritises national strategic goals, including self-reliance and the push to become a leading country in high-tech.

After a strong start to 2023, China’s economic activity has fallen short of expectations, with exports, consumption, production activity and investment all slowing. Most significantly, the property sector, which traditionally has been the engine of growth, is facing substantial headwinds amid large levels of debt, over-supply of apartments and weak sales. This poses a significant risk to the wider financial system.

In recent months, the government has announced a slew of policy measures to boost investment, encourage private sector growth and shore up consumer confidence.

In July, the Central Committee and the State Council jointly published a document[2] consisting of 31 provisions designed to boost confidence in the private sector and promote its continuing development and growth.

Later that same month, the National Development and Reform Commission (NDCR), China’s top economic planner, unveiled 20 measures[3] to restore and expand domestic consumption, focusing on the automobile, real estate and services sectors.

In August, the State Council published a new set of opinions[4] on boosting foreign investment by, for example, improving intellectual property rights and enabling smoother cross-border data flows.

As part of this bid to bolster the beleaguered property market, local municipalities, including in Tier-1 cities such as Beijing and Shanghai, have relaxed restrictions on home purchases and relaxed funding curbs on property developers.

Nonetheless, as most of these reforms are relatively modest, there is reason to expect further reforms to be announced at the Third Plenum, especially as the economy continues to struggle.

Key Areas of Focus

The New Development Pattern

The New Development Pattern was first articulated by President Xi in detail in 2020 and is likely to feature prominently in the Third Plenum communique. It broadly concerns how to transform the mechanisms of economic development in China[5] by making the domestic market and technological innovation the main drivers of growth. It was adopted as a guiding principle of the 14^th Five-Year Plan (2021-2025).

Under this strategy, China seeks to become the world’s leading innovator by fostering scientific and technological innovation. In February, President Xi called for innovation to be given a “prominent position in overall development”[6]. Decisions made at the Third Plenum should provide further insights into how Beijing intends to achieve this.

One possible development would be the creation of new Party Commissions in the finance and science and technology sectors, underlining the central role of the Party in setting priorities and guiding the allocation of resources, such as talent and funding. At February’s Two Sessions – simultaneous meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference – these two portfolios were overhauled, indicating that this will likely be a future priority, with a particular focus on the semi-conductor industry and self-reliance.

Foreign investment

The Party is expected to continue to prioritise efforts to improve business sentiment and promote greater openness to foreign investment. Free Trade Zones (FTZs) are expected to play a key role in creating a favourable environment for businesses and will serve to demonstrate China’s commitment to economic liberalisation, particularly following the June publication of new measures[7] to further open up the FTZs by implementing a range of international trade regulations that will help to improve intellectual property protection and align trade practices with international standards.

Pension reforms

Although pension reform was not discussed at the Third Plenum of the 18^th Central Committee in 2013, the issue is likely to be a priority at the forthcoming Plenum given China’s rapidly ageing population. Reforms could include measures to ensure there are sufficient workers in the labour force, but also to improve the financial sustainability of the pension system. Reforms in this sector will also serve to rebalance the economy along the lines of President Xi’s dual circulation strategy by boosting domestic demand to fuel economic growth.

Housing registration (Hukou) reforms

As China’s population ages, – there is an increasing need to re-evaluate the Hukou resident permit system, under which rural migrants living and working in China’s cities have not been able to access the same services as urban residents. Change is already afoot: this year, the province of Zhejiang[8] and the central government[9] announced significant changes to the Hukou system. These changes will aim to combat inequality and likely boost consumption. They could also facilitate further urbanisation, a past driver of growth that may well be featured in the Third Plenum communique, and bolster productivity and birth rates. However, it remains to be seen how far the Party is willing to implement deeper reform given concerns[10] from some urban residents, who are unwilling to share their relative prosperity with migrant workers, and from local authorities wary of having to spend more on public services.

Reform of State-Owned Enterprises (SOEs)

State-Owned Enterprises (SOEs), whether national or local, will continue to play a pivotal role in China’s economic development but there are some signs of change with specific SOEs moving their focus from asset management to capital management to align more closely with Beijing’s preferences. This highlights both the government’s increasing concerns over debt burdens and the role of SOEs in reshaping the economy by nurturing the growth of strategic emerging industries. There is an expectation that the Party will seek a middle ground in this area, balancing the recognition of SOEs as crucial for guiding the private sector’s economic development with an acknowledgement of the market’s role in resource allocation, price determination, and the creation of fair competition.

Conclusion

The Third Plenum is likely to offer the clearest indication yet of the economic reforms that China will embark on under President Xi and the new leadership. Given China’s lacklustre growth since reopening earlier this year after COVID-19 restrictions were lifted, there are increasing calls for greater reforms to address deep-rooted challenges that could continue to weigh on the economy. The extent and depth of political adjustments and reforms are still uncertain, but it is anticipated that the Third Plenum will seek to achieve a careful equilibrium between much-needed reforms to increase productivity and stimulate domestic consumption, and the consideration of political objectives of national security and rejuvenation. This approach appears to be guided by a conviction that security and stability can only come from the long-term sustainability of society, rather than from economic growth alone.

[1] https://news.sina.cn/2017-09-20/detail-ifymenmt5610055.d.html

[2] “Opinions of the Central Committee of the Communist Party and the State Council on Promoting the Development and Growth of the Private Economy”.

[3] “The Notice of the National Development and Reform Commission on Measures to Restore and Expand Consumption”

[4] “The State Council Opinions on Further Optimising the Foreign Investment and Enhancing the Attraction of Investment” was released in August to encourage foreign investments.

[5] http://www.xinhuanet.com/english/2020-11/03/c_139488445.htm

[6] http://en.qstheory.cn/2023-09/11/c_914462.htm

[7] https://www.gov.cn/zhengce/content/202306/content_6889026.htm

[8] Zhejiang residents will be able to apply for Hukou. This change will apply to the entire province except the provincial capital Hangzhou.

[9] The Ministry of Public Security called on local governments to abolish Hukou restrictions in cities and towns with fewer than 3 million people and relax rules in cities with 3 – 5 million people.

[10] Residents of larger cities are reluctant to share their relative prosperity with migrant workers. Additionally, local governments are wary of the increasing costs of public services should Hukou be completely abolished.

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